Alex Carrick: An antidote to some of today’s economic worries

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No doubt about it. The world economy has taken a worrisome turn.

Across the pond, the debt woes of so-called peripheral nations—those on the southern boundary of the euro-zone—have staggered north to Paris. French banks have come under scrutiny for perhaps being vulnerable to bad debt in Greece and some of the region’s other shaky nations.

The extent of that exposure, however, is being exaggerated. That’s what happens when speculators smell blood.

France and Germany account for approximately half of the euro-zone’s GDP. In the latest quarter (Q2), Germany’s economy exhibited no growth and the European Central Bank has been quick off the mark in raising interest rates and a needed reassessment of this policy has still not materialized.   
Furthermore, there needs to be firmer action to resolve the debt crisis, either through the adoption of joint Eurobonds and/or some form of fiscal union. The ongoing dithering demonstrates a lack of leadership that is a too-common feature of the current world economic malaise.

Japan is another case study in the perils of being rudderless. Prime Ministers keep being replaced on an annual basis; with Naoto Kan’s recent resignation, there have been six prime ministers since 2006.

There is still a great deal of work to be done fixing the damage from March’s devastating earthquake and tsunami. Few have confidence that Tokyo will seize the opportunity to invest in a new industrial zone in the Tohoku region that would help revitalized the national economy.

While a great deal of attention has been focused on the U.S. debt downgrade, Japan’s debt has also been lowered, from Aa2 to Aa3 by Moody’s Investors Services, to a great deal less fanfare. Aa3 is three steps down from Moody’s highest-quality rating of Aaa.

Japanese public debt as a percent of GDP is over 200 per cent. The comparable figure in the U.S. for the federal and state levels combined is 100 per cent. For Ottawa and the provinces in Canada, it’s risen to about 80 per cent from 60 per cent before the recession.

China’s economy remains a question mark. Emerging nations have been leading the world out of the recession and into recovery, but the broad phrase “emerging nations” is a bit of a cheat.

China is first and foremost in the leadership role. Many of the other emerging nations are “emerging” only because they’re hitched to China’s star, yet inflation has also become a major problem in The People’s Republic.

The U.S. economy seems nearly paralyzed. At the beginning of this year, recovery was sluggish but clearly underway nonetheless.

Several unique events have led to a stunting of growth, however. The Arab Spring has been an unprecedented advance for the peoples of MENA (the Middle East and North Africa) nations, but the turmoil has played havoc with world oil prices. They were driven upward in the earliest stages of the uprising in Libya. For a while in late spring, early summer, the global price of oil rose to US$110 to US$120 per barrel.

The resulting jump in the price of gasoline in Europe and North America tore a hole in consumer confidence. The routing of Colonel Gaddafi promises a re-opening of oilfields and pipelines in Libya. The actual increase to world oil supplies will be small, but it will be a symbolic piece of good news.

World oil prices have come off their recent highs, but the price at the gas pump never responds as quickly on the downside as on the upside.

Supply disruptions among auto firms and electronics companies in Japan left firms in many other nations, the U.S. and Canada included, idle for a while in the second quarter. In fact, that is one of the reasons cited by Statistics Canada as causing a small decline (-0.4 per cent quarter to quarter annualized) in Canada’s GDP in Q2.

It’s all about politics. Expect Republicans to take no action that might help Mr. Obama before the next vote for President in November 2012. That’s a long way ahead. Only in the U.S. would an election be considered as “looming” when it is still 14 months in the future.

So that’s the downside. What’s the upside? The U.S. housing market has been a major source of weakness in the U.S. overall economy. For many quarters, declines in residential investment took away from GDP’s bottom line.

In a case of reverse logic, the better news now is that U.S. housing can’t get any worse. And any improvement will provide a huge boost to the economy. In Canada, the forestry sector in many provinces, B.C. more than others, would dearly welcome a pick-up in U.S. home starts.

But Canadian forestry sector firms have not been sitting on their hands. British Columbia lumber producers have increased their sales to China and Japan. The latter will take even more product once the tsunami rebuilding efforts speed up this fall.

In the recession, Canada survived in fine fashion because our financial sector was on a sounder footing than in most other countries. That still applies. Also, while our governments have been spending—mainly to provide stimulus through construction activity—they remain in relatively good financial shape.

Canadian employment growth has been remarkable, more than half a million since the recession. The leader in providing net new jobs has been construction. That’s a trend that will persist.

Spending on construction in Canada is expected to double in the 10 years between 2004 and 2014, from $150 billion to over $300 billion. The engineering sub-component (40-plus per cent of the total) will climb even faster.

What are the projects? They’re partly public-sector works projects. The newly adopted approach to financing in Canada, termed P3 or public-private partnerships, has greatly opened up the potential for social projects to proceed.

Canadian engineering firms have learned how to make a profit while taking over much of the risk from government.

Other mega projects are in the area of resources/raw materials. This is where emerging nation demand enters the picture. Nor is it likely to disappear in a slowing world economy. China will continue to grow because much of its internal momentum is based on societal change resulting from the huge growth in the middle class.

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit www.dailycommercialnews.com/features/economy. Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter (Alex_Carrick) or Facebook. 

www.alexcarrick.com

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